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Yellen Says Policy Rule Would Undercut Fed Independence

July 16 (Bloomberg) -- Ira Jersey, director of U.S. rates strategy at Credit Suisse Securities, and Bloomberg’s Michael McKee and Peter Cook discuss comments from Federal Reserve Chair Janet Yellen before the House Financial Services Committee. They speak on “Market Makers.” (Source: Bloomberg)

Federal Reserve Chair Janet Yellen said legislation requiring the central bank to enunciate a rule guiding monetary policy would undermine the Fed’s independence.

Answering questions from the House Financial Services Committee, Yellen said “it would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule. No central bank does that.”

While the legislation would allow the Fed to depart from such a rule if market conditions warranted, Yellen said the measure would still compromise the Fed’s independence.

Political scrutiny “would essentially undermine central bank independence in the conduct of monetary policy and I believe that global experience has shown that we have better macroeconomic performance when central banks are removed from short-term political pressure,” Yellen said.

The draft bill, announced on July 8, would require the policy-setting Federal Open Market Committee to describe a strategy or rule for changing interest rates.

While it has little chance of passing in a Senate controlled by Democrats, the bill signals Republican interest in a more constrained and transparent Fed as it closes one of the most expansive periods in its 100-year history. Policy makers have kept the benchmark interest rate near zero for five years and used bond purchases to hold down long-term borrowing costs, expanding their balance sheet to a record $4.38 trillion in the process.

The bill is sponsored by Republicans Bill Huizenga of Michigan, a vice chairman of the financial services subcommittee on monetary policy, and Scott Garrett of New Jersey, who earlier filed a bill that would require the Fed to disclose more about the supervision of the biggest, riskiest banks.

To contact the reporter on this story: Matthew Boesler in New York at mboesler1@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Mark Rohner

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